Welcome to ‘new economics’; here’s how to deal with it

A leading fund manager has warned that a new economic world order means beginner investors should “manage their expectations”

Iona Bain

The first time “money issues” got interesting in my adult lifetime was just after the financial crash in 2008.

That’s why the Financial Times, at one time seen as a “dull” workplace for young journalists, couldn’t beat them off with a dirty stick after the the banks were bailed out (applications for work placements apparently went through the roof).

The second time is now. Brexit. Donald Trump. “What the f*** is going to happen to the economy?” That’s the question now being asked by people young and old, rich and poor, those who are heavily interested in economics and those normally interested in the minutiae of Taylor Swift’s love life.

With that in mind, I thought it was an apt time to attend the Association of Investment Companies Christmas lunch, where three respected fund managers gave their view on our new topsy-turvy world.

Since this trio have a professional interest in these matters, tasked as they are with investing in the most promising parts of the global economy, I thought it was worth hearing what they had to say.

All three had wise points to make but what really jumped out at me was a stark analysis from Bruce Stout of Murray International, one of the only investment managers to make a real virtue out of Brexit. His fund’s share price rise rose 22.7 per cent in the first half of this year.

But his rather saturnine outlook on the British economy is not all down to the B word (or indeed the yellow-haired kingpin across the pond).

He believes a new paradigm has been established in the world’s economy. He accepts that people of all generations would find it difficult to understand investment environments right now. “Basic templates which have existed in investment for 30 years no longer exist. Young people now think it’s normal to pay governments to hold their bonds or pay deposits into the bank and get nothing in return.”

He argues that economics have actually been long distorted by “an enormous surplus of debt at all levels in society – public, private and corporate”, which ends up having a deflationary effect unless it’s written off – easier said than done . He argues that this situation has “horrible consequences for growth rates and opportunities for the next generation.”

Expounding on his argument, Bruce says that capitalism has essentially been twisted by politicians “massaging economic policies” and not allowing the full Darwinian effect of capitalism take place, such as stopping companies (or specifically big banks) from going bust when they otherwise would have done. “When you allow the walking dead out into the economy, it forces down prices in manufacturing, in retail, in all areas…this, combined with technological innovation, has all had a downward pressure on pricing.”

While interest rates remain a big unknown, Bruce says that debt is the one constant in the economic picture that won’t disappear, and should interest rates rise, that debt will only become more to expensive to service.

“The traditional credit cycle is broken across the world. What we have painfully learned in recent years is that if you drop the base rate to 0 per cent, nothing will happen to pay down the debt. You can’t make people borrow.” The implications of this are particularly profound for young people. “For many generations, we have seen that young people buying homes have had a big effect on growth rates simply because they buy stuff to fill those homes. Now we have gone from getting a 110 per cent mortgage to 80 per cent, with a 20 per cent deposit not possible because you have student debt and other financial issues, that opportunity to buy a home just doesn’t exist anymore.”

Bruce reckons this won’t change until we have mass debt forgiveness and, as he simply explains, we can’t have that because the banks would go bust.

In such an environment, he believes the only way forward is “capital preservation” with diversification being (as ever) a crucial tool in managing risk. He says the investment industry is “obsessed” with relative performance when it needs to concentrate on the real needs of ordinary investors. “They tell me that their dividends go straight into their bank account and pay their gas bill.”

The key questions that beginner investors need to ask themselves, according to Bruce, are “do I have capital spare?” and “when do I need that money?”

“If it’s £600 that you need back in another six months time, forget it because no-one knows what will happen in six months time. However, if you can afford to put that money into markets for 5 or 10 years, history has shown there is a very good chance of making returns.”

His core message in a world where traditional economic models have broken down? Investors new to the game need to manage their expectations – otherwise, they’ll be sorely disappointed.

 

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